The energy transition and the complete revolution that the automobile industry is facing sinks its foundations into a peculiar metal: lithium. Smartphones, computers, vehicle batteries… All these fundamental cogs of the economic machinery have as a common denominator the lightest solid element in the world. Due to its lightness, energy capacity and resistance to discharge, it is unrivaled today when it comes to battery production. In the midst of growing demand, from the end of 2021 and during 2022, the price of lithium and its two main derivatives, hydroxide and carbonate, shot up to levels never before reached.
The great beneficiaries of this particular lithium fever were the few hands that, according to data from the International Energy Agency (IEA), are behind this market. In production by country, there are large reserves widely distributed in different areas of the world, but in 2019, the year with the most recent data in the IEA, Australia was responsible for the extraction of approximately 50% of lithium, Chile for more than 25 % and China around 14%. As far as processing to convert lithium into hydroxide or carbonate is concerned, the Asian giant was the undisputed leader with more than 50% of the world’s “refining” capacity, followed by Chile with approximately 30%. If the market share by company is considered, the American Albermale produced 24% of the lithium on the entire planet, while the Chilean SQM Lithium contributed 12% and the Chinese Tianqi Lithium 11%.
The two processed products of lithium, carbonate and hydroxide, are used for the production of batteries, however, lithium hydroxide is more valued because it has a higher concentration of lithium and because it is more efficient in the production of cathode materials for lithium batteries. In other words, it allows batteries with greater autonomy. After the fever of 2022, both in the case of hydroxide and carbonate, in recent months its price has plummeted by close to 50%, even causing paralysis in the mining industry in China.
But also, prices vary not only over time, but also depending on the region. Thus, in Europe the cost of both derivatives tends to be higher than in China, the world’s leading producer of batteries. However, in the European case there is also a considerable drop in the price per ton.
These lurches in the price are the symptoms, but to understand the causes of them, you have to look at different factors.
End of aid in China
As it is closely linked to it, it is not surprising that fluctuations in the electric car market help explain the large fluctuations in the price of lithium, as well as the differential price between Europe and China.
Behind the latest collapse in lithium is a significant slowdown in the sale of electric cars in China due to the end of aid for the purchase of vehicles and subsidies for the purchase of electric vehicles. During 2022, electric car sales skyrocketed in the Asian giant like never before, but this suddenly changed with the new year. According to data from the China Association of Automobile Manufacturers (CAAM), in January, the production and sales of passenger cars were 1,397 million and 1,469 million respectively, 34.3% and 35.2% less month-on-month and 32, 9% YoY.
“Due to the end of the subsidy policy for new energy vehicles and the obvious fluctuations in market prices, the production and sale of new energy vehicles reached 425,000 and 408,000 in January, 46.6% and 49 .9% less month-on-month and 6.9% year-on-year and 6.3%. The market share reached 24.7%”, writes the CAAM.
In contrast, although it enjoys a lower percentage of penetration and share of total registrations, the electric vehicle market in Europe is more stable, something that justifies the higher price of lithium, since demand has not plummeted unlike of the Chinese case. The latest registration data from ACEA, the European automobile association, show that 151,573 units of electric battery passenger cars were registered in the month of March throughout the Union, 58% more in year-on-year terms. With this increase, 13.9% of registered vehicles were of this type compared to 11.4% in March 2022.
A lithium facility is not a bakery
Asked about the causes behind this volatility of lithium, Luis Marquina, president of the Spanish association of batteries and energy storage (AEPIBAL), uses a metaphor to answer. Marquina refers that, beyond the key Chinese factor to which he also alludes, there is a big difference between a bakery and a lithium production facility.
“When the demand grows, this is about industrial work. It is not as simple as in the case of a bakery, which in the face of a very good business performance, by buying the store next door and expanding, is useful. Lithium is an industrial process that takes time to establish and develop ”, he explains.
“Over a period of time, the hydroxide and carbonate manufacturers, which are mostly Chinese, realized that there was much more demand for lithium than supply, and so they began to expand their production capacity, which took a while. . Now, a production peak has coincided with the end of aid for the purchase of electric vehicles in China. What happens, that there is a quantity of carbonate and hydroxide accumulated and, therefore, the price falls. Greater production capacity together with the drop in consumption leads to this drop in prices”, says the expert.
Unlike in other commodity markets, lithium producers have tended not to commit to production targets that are too high, lest they fall prey to not scaling production enough.
“As the EV penetration rate has gone from 1.6% five years ago to more than 10% in 2022, lithium producers have been able to deliver more lithium in 2022 than they had anticipated in each one of the three previous years. This is in stark contrast to copper, a mature market in which miners tend to deliver less than they often promise,” Bank of America writes.
The lithium market is different from that of copper, but, on the other hand, it has a certain resemblance to that of oil in its operating logic, saving the many differences between a market as mature as that of crude oil and one in full swing . And it is that, in addition to the blow of political decisions via premeditated production cuts, black gold also responds to that logic of production and the incentive that marks the evolution of prices so exaggeratedly in lithium. When the price of crude oil rises, producers find a good reason to “broaden the bakery” and invest more money and extra efforts to produce more barrels of oil. Once the fruits of the extra effort bloom and that oil hits the market, the price drops again. Again a nuance. Reality does not always respond to this logic, since the turn towards a less polluting economy has put downward pressure on investments in fossil fuels and has pushed those related to the energy transition. In the words of a knowledgeable but interested source such as Aramco CEO Amin Nasser, “investment in the oil extraction segment (upstream) is between 370,000 and 400,000 million dollars, when in 2014 it was around 700,000 million dollars”, he explained to the CNBC in a recent interview.
What can be expected regarding the price of lithium?
In relation to what can be expected, Marquina first highlights that lithium is not lacking. “That’s not a problem. New lithium deposits are constantly being found. What there is a problem is that the lithium extraction process, in the start-up of a mining plant. At least 10 years are needed to start producing. It may happen that in any of the electric car markets the prices of these vehicles go down, which will cause the price of lithium to skyrocket in the medium term, in six or seven years, but not because there is a lack of lithium itself, but rather due to lack of mining capacity”, he foresees.
For their part, Bank of America reinforces Marquina’s vision. “Lithium has been extremely volatile and we expect further declines in its prices. We think lithium is a capital-intensive commodity, but not constrained by scarcity. What do we mean by this? That there is no shortage of lithium deposits, so producers can increase their production, another reason to anticipate price drops throughout 2023 and 2024,” analysts consider.
However, there are also factors that can catapult the price of lithium up. In addition to the emergence of the electric vehicle, the way in which supply chains are behaving can also make it more expensive. “A multipolar production scenario is taking shape, in which the hydroxide and carbonate manufacturers are going to be very close to the lithium deposits. This is what is being projected in Extremadura. In the medium term we are going to this scenario of many plants spread around the world and, therefore, wherever there are lithium deposits. We will see it in Iran, in Chile, in India, in the United States, in Bolivia and we could also see it in Europe”, says Marquina.
“The industrial policies of the United States and the European Union, with their vision of bringing lithium production closer to their borders, should raise the minimum price of lithium. Coupled with possible exponential demand at the same time as this relocation of supply chains occurs, we may see periodic shortage scenarios. In other words, volatility is set to stay,” says Bank of America. As part of the law on critical raw materials, the European Union has studied the possibility of legislating so that 30% of the demand for refined metals is supplied from within the Union itself by the year 2030.
Beyond all these factors that influence or may influence the price. Innovation is also important. Inexpensive, non-lithium sodium batteries, though fragile, have been one of the alternative lines of research. According to Bank of America, the Chinese company Sehol presented a compact vehicle powered by this type of battery. The heart of this vehicle had an energy density of 120 Watts per kilo, to put it in context, the Tesla Model 3 battery has close to 300 Watts per kilo. Meanwhile, Argonne National Laboratories has published research on a lithium-air battery that could reach an energy density of 1,200 Watts per kilo.
Follow all the information of Five days in Facebook, Twitter and Linkedinor in our newsletter Five Day Agenda